According to the performance on the daily chart, and despite the recent rebound, the EUR/USD has not exited its bearish path, and there will be no first breach without the stability of the Euro-dollar above the 1.0000 parity price.
The sum of multiple remarks in Washington in recent days by a group of board members points to the underlying disagreement likely to become more pronounced as the year is coming to an end. Just as the Federal Reserve remains fully focused on combating runaway US inflation pressures, the ECB’s hawkish policymakers appear similarly determined to extend the sharpest tightening in Eurozone history until 2023. They would supplement the interest rate increases with a quick start to the euro contraction. 8.8 trillion euros ($8.6 trillion) balance sheet.
Meanwhile, more pessimistic colleagues are becoming concerned about the impact of such aggression after a 125 basis points increase. Such a crisis may materialize once officials reach a level where borrowing costs are considered to have a neutral effect on the economy, perhaps around December.
For his part, Bank of France Governor Francois Villeroy de Gallo said in a speech at Columbia University in New York:
“We may not stop raising interest rates there, but we will enter another part of the journey: a more flexible and perhaps slower phase,” he said.
The sense of the end of 2022 as a turning point in the debate set by the French, who has declared himself a pragmatist and refuted any specific designation of his views, is a common theme. The hawks, including Dutch governor Klaas Knott and Latvian Martins Kazak, expressed similar views, while some colleagues expressed preferences for continuing the aggressive moves.
For his part, official Joachim Nagel said: “The ECB board should not calm down too soon,” while his Slovak colleague Peter Casimir argued, “We need to stay in power.” Meanwhile, Belgium’s Pierre Winch said it would be “reasonable” for the ECB to raise borrowing costs to 3%, even as a mild recession in Europe’s base case scenario would not be enough to control inflation. In contrast, their Italian colleague Ignazio Visco warned that 2023 would be “very difficult”.
Portugal’s Mario Centeno warned that there may be a cost to maintaining such aggression at a time of massive economic uncertainty.
“The worst case for all of us is if at some point we need to go back and forth,” he added. We need to be a source of stability. We cannot be seen as not going anywhere or at some point having to back out of our decisions,” he said.
For their part, officials in Washington faced a significantly deteriorating outlook, with the International Monetary Fund slashing its 2023 forecast for eurozone growth by more than half to just 0.5%. Forecasts show that Germany and Italy will witness outright contractions during the year. Lagarde has publicly insisted that – despite the economic consensus to the contrary – the eurozone is not currently in a recession. But its vice president, Luis de Guindos, acknowledged that such an outcome on a “technical basis” was possible.
In addition to the challenges of price calibration in bleak and uncertain times, the ECB will also be faced with the question of what to do about the extremely generous terms of more than EUR2 trillion in long-term loans. Some officials believe it is legally feasible to retroactively change their generous rules for banks.
Another problem is what to do with the EUR3.3 trillion in assets the European Central Bank has bought to support dormant inflation, which is now at 10% – five times the target – without prospects of falling back to 2% until 2025 at the earliest. ECB Chief Economist Philip Lane was more conservative about the policy path he will propose to colleagues in less than two weeks.
“Obviously we’ve moved away from a situation where the maximum increment is 25, but we still have to work at our optimum speed,” he said.
According to the performance on the daily chart, and despite the recent rebound, the EUR/USD has not exited its bearish path, and there will be no first breach without the stability of the Euro-dollar above the 1.0000 parity price. The bears prevail, and the break of the 0.9720 support ends the momentum of the current rebound. Eurodollar gains are still vulnerable to decline as long as the Russia-Ukraine war continues, which impedes the economic recovery of the euro zone. Today, the euro will be affected by the announcement of the German ZEW readings, and the dollar will be affected by the announcement of the US industrial production rate.